Starbucks Porter’s Five Forces Analysis: Competition in the Coffee Industry
Porter’s Five Forces model is a simple and yet effective tool used for analyzing the level of competition in an industry. It helps to analyze how the business itself is positioned relative to its competition and its competitive strength. The tool was named after Michael E Porter who developed it. It is used to analyse five important forces that shape competition in the business world.
From the bargaining power of suppliers to the potential threat from the substitutes, the tool is used to analyse all the forces that can have an impact on the competitive position of a business firm. Especially, this analysis becomes highly relevant in the global environment and in the case of large firms. Following is an analysis of the five forces that influence the competitive position of Starbucks in the industry:
Threat of new entrants: moderate
The threat of new entrants for Starbucks is moderate. The barriers are not very high and the initial investment to start a coffee brand is not high either. The level of saturation in the industry is moderately high. New entrants can compete with brands like Starbucks at local level. However, their possibility of being successful remains low to moderate. Starbucks has grabbed a large market share based on its infrastructure, efficiency and product quality. Still, switching costs being low, the new brands can attract customers using lower prices. So, the threat of new entrants remains. However, it gets mitigated to a large extent by brand image, market share and other factors like brand loyalty. An important factor that gives the Starbucks brand a competitive edge is its access to raw materials and suppliers. Based on its size, scope and ability to pay, Starbucks has access to better quality coffee and a larger number of suppliers globally. All these factors act to moderate the level of threat posed by the new entrants. The threat has increased to some level due to the entry of McDonalds in this line through McCafe.
Threat of Substitutes: Moderate to high
The number of substitute products for the Starbucks brand coffee is high. From juices to tea and alcoholic as well as non-alcoholic beverages there are several substitutes available in the market. There are pubs and restaurants that provide both good ambience and quality products. Another source of threat in this area are the homemade products that the consumers can make at home. Apart from it the switching costs are negligible. These all factors make substitute products a moderate to big threat. Still, there are some factors that moderate this threat to some extent. Apart from the premium quality coffee, excellent customer service and a great ambience, Starbucks also sells premium packaged coffee and coffee makers. Premium quality and brand loyalty moderate the threat of substitutes to some extent.
Bargaining power of buyers: Moderate to low
The bargaining power of buyers in case of Starbucks is moderate to low. The size of individual purchases is small and so single buyers do not hold enough influence. Apart from it the coffee brand has a diverse customer base. Its customers are mainly quality sensitive and willing to pay higher prices for premium quality products. Still, the prices cannot be excessively high because customers watch for such trends and would start switching. Moreover, the product mix of Starbucks is diverse. Based on all these factors the power of buyers remains low.
Bargaining power of suppliers: low to moderate
Suppliers can exert only low to moderate pressure on Starbucks. The brand has its own supplier diversity policy that it uses to select the suppliers. Ethical sourcing is another major policy at Starbucks. The brand sources Coffee ethically from several parts of the world. It is also growing with the coffee farmers directly that has helped it gain higher control over its supply chain. It eliminated the mediators and started sourcing from the farmers directly. Starbucks has developed great relationships with both tea and cocoa farming communities to educate them, about better cocoa farming practices and to help them derive maximum profits from it. All of this has worked to reduce the clout of the mediators and the suppliers. Moreover, the number of suppliers is high and Starbucks has plenty of room to exercise choice. So, its excellent supply chain management in the last decade has reduced the bargaining power of suppliers and brought it low.
Competitive rivalry: Moderate to high
The intensity of competitive rivalry in the industry is moderate to high. It is because there is monopolistic competition in the industry and the number of firms competing for market share is high. The entry and exit barriers are small. The main factor that moderates the competition for Starbucks is its market share. It has the highest market share followed by Dunkin and McCafe. However, the premium quality and product based differentiation that Starbucks uses also give it some edge over its competitors. However, the industry has matured and growth rate has moderated as a high number of players are competing for market share. Still, overall there is always space in this industry for new players, which adds to the intensity of competition in it. Based on all these factors the intensity of competition against Starbucks remains moderate to high.
This analysis shows that Starbucks has been able to moderate the competitive threat against it based on premium quality of its products as well as quality of customer service. Apart from it, the global coffee brand has excellently managed its supply chain which has reduced their bargaining position. The Porter’s five forces analysis of Starbucks shows that the brand has remained strong against competitive threats by virtue of its core competencies. Overall, the strength of the five forces discussed as a part of this analysis is moderate. Starbucks has acquired some excellent competencies and built a strong brand that gives it a competitive advantage in the industry and moderates these forces.
Sources: https://www.starbucks.com/responsibility/sourcing/suppliers https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf